Fading Optimism on Rebound

Private and New York Fed economists are becoming less optimistic about U.S. growth prospects.

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Federal Reserve staffers and private sector economists are becoming increasingly glum about the prospect that the U.S. economy will rebound strongly in the second half of 2015 after a shaky start to the year.

New York Fed staff economists said in a new report growth should regain some of its swagger after stumbling during a chilly first quarter, but will fall short of the 3% some had hoped for in light of a string of weak data.

"Consequently, the staff forecast anticipates that growth will rebound to around 2.5% annual rate over the remainder of 2015 and 2016," the New York Fed said. "Nonetheless, the growth rate in this forecast is below what we anticipated at this time last year."

The Philly Fed's second quarter poll showed economists now see U.S. gross domestic product expanding just 2.4% this year, down from a median 3.2% estimate in the first quarter survey.

Indeed, they now see growth falling short of 3%, considered a level strong enough to get the labor market back to fuller health, for the foreseeable future. Forecasters see real GDP growth of 2.8% in 2016 and 2017 respectively, with the rate easing to 2.5% in 2018.

The New York Fed did say it sees “many of the underlying fundamentals of the economy as positive for growth, with household wealth and real income solid, fiscal policy slightly stimulative, and monetary policy still accommodative."

Still, the report pointed to reduced investment in domestic oil exploration due to falling crude prices as a likely near-term drag on business investment. In addition, a strong dollar and weak growth overseas "are expected to lead to a negative growth contribution from net exports."

Respondents in the Philly Fed survey reduced their forecasts for nonfarm payroll employment gains in 2015 and 2016, the report said. At the same time, they were slightly more optimistic about the unemployment rate. They see an annual average jobless rate of 5.4% in 2015, 5.0% in 2016, and 4.8% in 2017 and in 2018. "The projections for 2016, 2017, and 2018 are slightly below those of the last survey," the Philly Fed said.

On the inflation front, forecasters expect the overall consumer price index to average 1.9% in the second quarter, above the prior survey's 1.6% estimate.

For the year as a whole, however, inflation looks set to remain very weak, and far below the central bank's 2% target as measured by the personal consumption expenditures index.

Survey respondents see U.S. inflation averaging just 0.7% in the final quarter of this year compared with the same period in 2014, down from 1.1% in the first-quarter survey. For the Fed's preferred PCE measure, that figure is 0.8%, also down from 1.1%.